Blame China, not Trump, for the US shut out of Huawei

A robot called "Tappy" which monotonously jabs away at mobile phone screens does not, let's face it, sound like the most sophisticated of technologies.

So it's possible to feel a degree of sympathy with the Chinese firm Huawei which finds itself accused by the US Justice Department of the theft of this supposedly bleeding-edge bit of intellectual property from T-Mobile. The phrase "trumped-up charges" (in every sense) comes to mind.

Yet, of course, there's a bigger picture here than Tappy and Trump. There are questions that go beyond the agenda of the current occupant of the White House and his rabidly sinophobic advisers. Foremost among them is this: are Chinese firms operating in the west a potential security threat? Specifically, should Huawei be shut out of the construction of new 5G infrastructure due to concerns that the company could build "back doors" into its systems that could then be exploited by the Chinese state for espionage purposes?

 In my 2013 book, Chinese Whispers, I suggested that much of the then suspicion of China's commercial influence abroad was over the top. At that time I argued that it was simply not in the commercial or broad economic interests of the Beijing leadership to use western infrastructure assets, or allow them to be used, for nefarious purposes. In some respects that remains true. It's hard to see why there's such anxiety in the west over the Chinese state buying brands like Weetabix, trying to purchase US oil companies or even investing in nuclear power stations.

Why would the Chinese state, which wants to use Bradwell in Essex to provide a proof-of-concept for a new global nuclear reactor technology export business, interfere with the UK's power supply for political reasons? This would, at a stroke blow up its own multibillion dollar investment.

However, one has to accept that the Chinese political leadership has changed profoundly over the past six years. There has been a clear authoritarian turn under Xi Jinping, who has abolished term limits in place since the death of Mao Zedong. Xi has also launched a severe clampdown on domestic dissent, harnessing the full power of online technology to do so.

The new online "social credit system" is somewhat overhyped as a dystopian authoritarian tool, yet it could become one.

Meanwhile there have been countless assertions of party control over nominally private sector firms. Xi came to power promising to let the market take a more "decisive" role; but he has presided over a resurgence of the party-state. The giant Chinese internet and e-commerce companies - Alibaba, Tencent, Baidu, JD. com - have found themselves much more closely regulated.

Once it was just about possible to believe the assurances of Huawei's founder Ren Zhengfei that it had experienced no state influence whatsoever and would not permit it. But no longer. And Xi's conduct is to blame for that.

Alibaba's Jack Ma was "outed" as a member of the Communist Party last year in state media. Members are required to show loyalty to the party above all else. Ma has also announced that he will step down by the end of this year and some informed observers suspect government influence in that decision.

In this context of surging digital authoritarianism and growing private sector subordination it is, sadly, prudent to keep private Chinese firms at arm's length. The UK should follow the lead of the US and prevent Huawei from providing its mobile phone infrastructure.

This is unfortunate for Chinese firms and employees. Huawei is a genuine world leader in its field. And it is precisely the kind of globally competitive technology firm that China needs to prosper if it is to see domestic living standards rise over the coming century.

Perhaps the one, small, positive is that the shut out of Huawei from the west underlines the true nature of China's crisis: that the country's authoritarian leadership is now obstructing the country's economic development.

Autocracies are fragile - however sophisticated they may seem

It's a tale of two autocracies. Last week we laughed at the apparent primitiveness of the Russian intelligence services and simultaneously trembled at the sophistication of their Chinese counterparts.

Bloomberg Businessweek magazine reported that China's military has managed to implant a microchip no bigger than a grain of rice in US computer mother boards, as they were being assembled in China, effectively giving Beijing a secret back door into giant American firms including Amazon and Apple.

It was seen as a jaw-dropping technical feat. "Like witnessing a unicorn jumping over a rainbow," one hardware expert commented.

The Russian security services, meanwhile, were exposed as low-tech bungling amateurs. Western governments revealed that earlier this year Dutch police had apprehended four Russian agents as they attempted to hack into the investigation into the Salisbury novichok poisonings at a chemical weapons watchdog facility in the Netherlands.

They were sitting in the facility's car park in a rented car with a coat over their equipment. One of the spies even had a taxi receipt on his person, showing that they had been picked up at the Moscow headquarters of the GRU military intelligence service. An examination of the men's laptops and phones confirmed that they had been involved in a host of other notorious computer hacks on western targets.

And it got worse. Using the personal information on the agents released by the western authorities, the investigative website Bellingcat was seemingly able to produce a database of the names of a further 300 GRU operatives, including their mobile phone numbers.

No unicorns or rainbows there. So why are the Chinese so good at the spying game and the Russians so hopeless? One explanation offered was that the skills of the once formidable Russian intelligence services have degraded since Soviet days.

Alexander Gabuev, of the Carnegie Moscow Centre think tank, suspects they registered their private cars and names with the Russian Traffic Authority, using the GRU address, in order to access special road privileges, such as not being stopped by the police, immunity from drink driving fines and exemption from car tax. Did someone at the notoriously corrupt Russian Traffic Authority sell this list? "[The] root cause of [the] largest intelligence failure in modern Russian history is a combination of wrecked values system in parts of the Russian society, notorious incompetence and, well, banal corruption," Gabuev concludes.

So how different is China? Less different than this week - and the general tone of western commentating on China - might have led people to believe. For corruption is also an advanced cancer in that society too.

The China scholar Minxin Pei, in his recent book China's Crony Capitalism describes how "local governments penetrated by these elites unavoidably experience degradation in their capacity for providing public goods" and "corruption networks, consisting of officials, businessmen, and gangsters, seize control of these jurisdictions and turn them into local mafia states".

In 2015 Ma Jian, a senior official at the Ministry of State Security (MSS), China's equivalent of the GRU, was arrested in a corruption scandal. Ma was revealed to have put the MSS's spying capabilities at the service of a real estate tycoon in exchange for bribes. He had six mistresses and two illegitimate children.

Xi Jinping has ostensibly cracked down on corruption by Communist Party officials in recent years. But in the absence of any transition towards government transparency or the rule of law this feels more like the consolidation of political power by Xi, crushing rival factions, than a genuine attempt to clean up China's rotten public realm.

China's rapid economic growth of the past decade, a period over which the developed world has struggled, has led to something of a panic in the west, a crisis of confidence not only in our liberal economic model but our liberal democratic institutions.

This was magnificently symbolised when The Times recently carried a piece by David Cameron's exspeech writer, Clare Foges, imploring us to learn lessons from the world's new generation of "strongmen", including China's Xi Jinping.

But all autocracies are inherently fragile, however slick and impregnable they may look from the outside and from a distance of several thousand miles. For all their surveillance, the information feedback channels, which all governments need to be effective, tend to be calamitously defective. Reform-blocking vested interests are much harder to override in an environment of collusive corruption than they are in democracies with a free media and the rule of law.

As Minxin Pei puts it: "Instead of institutional resilience [China suffers from] pervasive institutional decay - degeneration of norms, disloyalty to the regime and subordination of the regime's corporate interests to the private interests of members of corruption networks".

Overestimating the competence of the autocrats of Beijing might be as dangerous as underestimating the thugs of Moscow.

All autocracies are inherently fragile, however slick and impregnable they may look from the outside and from a distance of several thousand miles

Donald Trump’s duplicitous ‘fair trade’ rhetoric

Donald Trump sometimes tries to claim he’s not really a crazed protectionist, merely a champion of what he describes as “fair trade”. The implication is that if trade was not “rigged” by cheating foreigners, he would gladly decommission his battery of new import levies.

So if China stopped its intellectual property piracy, its forced technology transfers, its restrictions on US access to its own market, its currency manipulation, we could have trade peace in our time. If Europe would only end its discrimination against American vehicle imports, we would all be able to get along famously. And so on, with the same applying to Mexico, Canada and every other country that has felt the lash of Trump’s anger on trade. But as Mitt Romney once put it, “such promises are as worthless as a degree from Trump University”.

It should be pretty clear by now Trump’s “fair trade” rhetoric is a study in diplomatic and commercial bad faith.

Today’s 10 per cent tariffs from the White House on a further $200bn of Chinese imports – hitting handbags, rice and textiles, along with several thousand other items – take the total value of trade affected by Trump to $250bn. That’s the value of roughly half the US imports from China.

It would be brave to bet against US tariffs eventually landing on the other half too, as Trump has explicitly threatened. Those who predicted the “grown-ups” in the White House would restrain the president and prevent a trade war breaking out do not look particularly prescient today.

The US claims China is not engaging with its trade concerns. Yet some in the White House privately say they are delaying imposing the full – previously threatened – 25 per cent tariff rate on imports to give US companies more time to shift manufacturing back from China to the US. It seems the real strategy is less about making global trade fairer, in Trump’s eyes, than in incentivising industrial “reshoring” onto American soil.

There is actually a reasonable case for penalising China for its flouting of the rules of multilateral trade, such as through overproduction, dumping overseas and the nation’s excessive restrictions on market access. But a policy of reversing the globalisation of supply chains really does ignore the foundational economic lessons of Adam Smith about the benefits of the division of labour, and of David Ricardo on the merits of a nation recognising its comparative advantage.

The primary loser from Trump’s trade deal will of course be the American consumer. The hypothetical benefits of more manufacturing jobs will be more than cancelled out by higher prices in the shopping malls.

The Trump administration has exempted consumer electronics such as smartphones after lobbying from companies including Apple which, famously, assembles its iPhones in China before importing them to the US.

Chinese bicycle helmets and baby high chairs were also exempted, which suggests someone in the White House, if not the president himself, intuits tariffs are likely to push up domestic prices – which may not be helpful ahead of US mid-term congressional elections.

But whoever it isdid not intuit enough. For the idea one can limit the domestic economic impact of tariffs by carving out exemptions for certain popular or sensitive products is naïve in the extreme. In this age of sprawling and complex cross-border manufacturing supply chains there are connections that are hard, if not impossible, to perceive.

As the Apple boss Tim Cook notes, there are iPhone components manufactured in the US which are exported to the China so it can be assembled. What if China imposes tariffs on those in response to Trump’s tariffs? That will likely push up US iPhone retail prices even if there are no direct tariffs imposed by Trump. Deliberately clog the arteries of trade and the economic damage will inevitably show up somewhere, perhaps where it’s not expected.

What will the impact be on the rest of the world, on growth? China is already retaliating and will probably match US tariffs dollar for dollar, at least as far as it can given its bilateral trade surplus. Europe has hit back on steel import duties with charges on Harley Davidson motorcycles and Florida orange juice.

The Bank of England has estimateda global trade war – in which everyone raises tariffs on everyone else by around 10 percentage points – would slow worldwide GDP growth by around 2.5 per cent over three years. That’s a serious economic loss in the context of a $90 trillion global economy. It would hold back UK GDP growth two per cent and the US equivalent around five per cent.

But such estimates, though reasonable, are also potentially misleading. As Maury Obstfeld, chief economist of the International Monetary Fund, recently warned: “The multilateral rules-based trade system that evolved after [the Second] World War... and that nurtured unprecedented growth in the world economy … is in danger of being torn apart”.

This regime rupture isn’t an outcome which one can reliably model based on historic economic relationships. It would put us in a wholly new and dangerous world. Trump says trade wars are “easy to win”. He’s wrong. But multilateral trade systems could be easy for a belligerent president to break. And we may find it terribly hard to put them back together again.